Author: Ann coins Institute
- Binance Research Institute defines the Decentralized Autonomous Organization (DAO) as "an organizational form that coordinates member actions and resources through a set of multilaterally agreed, a priori binding and formally transparent rules."
- Existing DAOs take many different forms, including blockchain, ecosystems, protocols, natural resources, and mutual protection.
- Decentralized autonomous organizations can be classified using a classification based on the following four elements: multilateral agreements, resource management, discussion processes, and voting processes.
- In terms of a decentralized autonomous organization and its legal nature, there are two options:
- Legal entities: Integrate decentralized autonomous organizations into the existing legislative environment, so that you can directly control off-chain resources and enter into legally binding agreements; usually through BBVA or ITAS (Innovative Technology Arrangement and Service Act) regulations To achieve.
- Unincorporated entities: This option is closer to the organizational form envisaged by purists: it is independent of the existing legislative environment and is usually achieved through "qualified code compliance" (QDC).
- In terms of coordinating the interests between a decentralized autonomous organization and its members-an incentive model rooted in game theory research is needed to overcome issues such as prisoner's dilemma, commons tragedy, and avoidance of Byzantine behavior.
- In addition, well-designed incentives are particularly needed to help decentralized autonomous organizations overcome the problem of low voting rates in governance decisions: decentralized autonomous organizations that are truly scalable and coordinate a large number of members have not yet appeared.
The current trend of decentralized autonomous organizations is reappearing, which is evident from the emergence of several new projects. Although the highly criticized implementation form of TheDAO already exists, the conceptualization theory of decentralized autonomous organizations is still in its infancy.
This report explores the current state of development of decentralized autonomous organizations, proposes a classification method for this study, and analyzes related industry actions.
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Decentralized autonomous organization
Shortly after Bitcoin began to make its mark, Decentralized Autonomous Organizations (DAOs) quickly became a new dream for many early developers and users. Having a digital, anonymous, value carrier like Bitcoin brings them unlimited opportunities. Suddenly, everything seemed possible.
Decentralized autonomous organizations promise to revolutionize the way we build socioeconomic relationships. No one really knows how to do this. This used to be a process of crossing the river by feeling the stones, and it is still the case today.
So, what exactly does a decentralized autonomous organization promise?
The ability to build large-scale, merit-based communities with minimal barriers to entry, externalities, and largely based on the spirit of Bitcoin, shakes off dependence on traditional institutions. Ironically, although Ethereum has played a leading role in creating a decentralized autonomous organization, the smart contract risks associated with its programming language Solidity are also a major obstacle to the development of a decentralized autonomous organization.
In the following sections, this report explores the current state of development of decentralized autonomous organizations. But before we start, let's give it a precise definition:
Due to the lack of a generally accepted definition, Binance Research Institute proposes a definition of a decentralized autonomous organization for this study:
An organizational form that coordinates member actions and resources through a set of multilaterally agreed, a priori, binding and formally transparent rules.
This definition is not an abstract summary from the perspective of basic technology, but mainly considers its function. It is in the process of examining the three obvious components of a decentralized autonomous organization (DAO)-D (decentralization), A (autonomy), and O (organizations)-one by one. Forming.
Generally, the definition of a decentralized autonomous organization is indispensable with the core concept of "decentralization". But in this definition, we circumvent this concept that people often talk about but still have a little understanding, because the concept itself needs more detailed analysis.
In the cryptocurrency field, "decentralization" refers to either the physical distribution of hardware (Lenovo: Verification Nodes & Full Nodes) or the diffusion of political influence. This refers to the latter. Unlike the traditional hierarchical power distribution, the common methods of decentralized autonomous organizations are to promote peer-to-peer coordination. This element can be described as a multilateral decision-making process.
[…] Multilaterally agreed […]
The second element of a decentralized autonomous organization is "autonomy", which is its ability to manage itself.
This self-management ability stems from the use of smart contracts to formulate "rules of the game" built by code for any particular decentralized autonomous organization. Accordingly, the decentralized autonomous organization is governed by a set of rules that are a priori binding and formally transparent. Regardless of the participation of third parties, the corresponding smart contract can perform organizational functions in an autonomous way.
[…] Adopt a set of a priori binding and formally transparent rules […].
Therefore, the "autonomy" characteristic of decentralized autonomous organizations can be summarized as "the degree of smart contract management of activities".
By adopting a new method of institutional economics, all activities can be described by value stream, which is particularly suitable for trading ecosystems that are not based on (interpersonal) trust. Therefore, the ability of a decentralized autonomous organization to implement value stream activities, that is, the ability to take action to achieve autonomy, depends on its ability to allocate and manage resources (ie, funds). Therefore, the "autonomy" capability of a decentralized autonomous organization is essentially related to its ability to directly control resources.
[…] Actions and resources […].
The first two major elements, namely "decentralization" and "autonomy", respectively focus on explaining the objects managed by the multilateral agreement and the resource control method of the decentralized autonomous organization, so the decentralized autonomous organization is well defined Range.
In addition to the scope, a final consensus must be reached on how to operate within this "multilaterally agreed autonomy". In essence, it is to answer the question: how can a decentralized autonomous organization decide which elements it wants to control?
To answer this question, there must be some discussion and subsequent decision-making processes.
This discussion must formally define a certain agreed-upon discussion process that can be either freely decided or based on rules. Generally speaking, the proposals discussed are subsequently voted on. By definition, this voting process must take place on-chain, otherwise it is impossible to determine whether the rules can be followed.
An organizational form of […] coordination […].
In general, the only way to guide this form of organization (DAO) is to use a decentralized ledger technology capable of executing smart contracts. In addition, contractual arrangements also protect participants from breach of contract by providing tough counter-attacks such as state coercion. However, unlike smart contracts, they can test requests against business validation rules without limiting the scope of qualified actions a priori, thereby preventing (smart) contract defaults.
2. Decentralized Autonomous Organizations: Changing Faces
2.1 Form of decentralized organization
After better understanding what a decentralized organization is, we can look at its actual implementation form. Extensive discussions have shown that such organizational entities can take many forms.
For example, they could be:
- Blockchain: For example, Dash deploys part of its block rewards to an investment pool that can be allocated by members. It can be said that Bitcoin should even be regarded as a (raw) decentralized organization, because it uses rewards to a large extent to perform a specific function, namely the state of the agreed UTXO collection.
- Ecosystem: For example, some decentralized organizations (such as Aragon) have created entire ecosystems, including apps, digital justice systems, etc.
- Agreement: By far the most successful decentralized organization is MakerDAO. MakerDAO and its DAI are both core parts of the current DeFi industry and are mainly governed by MKR holders (members of decentralized organizations).
- Mutual protection: NexusMutual prevents smart contract risks by avoiding smart contract failures.
- Natural resources: A question that social and economic activists have been asking for a long time is: Why can the only non- "human" institution with a legal entity be an organization? For example, New Zealand has granted corporate rights to a river. Similarly, Terra0 attempts to create a decentralized organization that accumulates capital by auctioning logging permits to achieve forest autonomy and self-ownership. In the end, such a "forest decentralized organization" can not only use its capital to purchase land in its own forest, but also the surrounding forest. Although it sounds a little weird, this structure is unique and allows confirmation of commons that are often overlooked. Empowering the commons to participate in the market on an equal footing can be the first step towards limiting the externalities of business operations. However, it depends on whether this right to the commons can be respected and fulfilled.
2.2 Facilitating factors
The emergence of decentralized autonomous organizations is largely facilitated by multiple DAO operating systems (OS), enabling them to quickly set up and use "plug and play" solutions. Currently, the most popular emerging frameworks include Aragon, DAOstack, and Colony. However, it is important to point out that these projects are still in the early stages of their development, so many use cases are still experimental. Aragon is currently the most mature operating system. These operating systems are often complemented by extremely minimalist funding distribution frameworks such as Moloch, MetaCartel, and TheDAO.
The following table shows the dollar-denominated resources based on the number of projects using the corresponding smart contracts and the locks in them.
Exhibit 1-As of November 15, 2019, the USD denominated amount of assets locked in the DAO organization, source: Binance Research Institute
Exhibit 1 clearly shows that according to the amount of assets locked in DAO smart contracts (in US dollars), TheDAO's performance clearly outperforms any other decentralized autonomous organization. In particular, for TheDAO, a 2016 asset (ie Ethereum) valuation was used. If you use the current valuation, TheDAO's net worth will increase by a factor of 10.
Figure 2: Number of Decentralized Autonomous Organizations Created / Number of Successful Funding Requests, Source: Binance Research Institute
Exhibit 2 shows the number of decentralized autonomous organizations that already exist. However, this analysis does not conduct a case-by-case analysis of the "requested" decentralized autonomous organization or launch the DAO operating system, but rather adopts a macro perspective.
As the barrier to entry is lowered, it is likely that more and more projects will use one of the existing decentralized organizational frameworks to create their own decentralized organizations. Because of this, we increasingly need a framework to help us classify decentralized organizations.
Subsequently, Binance Research Institute proposed a hierarchical classification method based on the previously determined elements of the decentralized autonomous organization, including the scope of multilateral agreements, resource management, and discussion and voting processes.
In general, each taxonomy aims to describe all the differentiating features and their potential implementation forms. At the same time, however, classifications cannot overlap. Therefore, the classification elements should be mutually exclusive, but overall they should be comprehensive.
Most importantly, the taxonomy only needs to state the elements of differentiation, which are the most relevant elements. A taxonomy should not be a structure that covers every potential form of implementation. Therefore, the following DAO taxonomy for this study consists of only 4 elements. The design choices of these elements may affect several other aspects of the decentralized organization that will be briefly mentioned later, but these aspects are not important.
The taxonomy proposed by Binance Research Institute for this study is a hierarchical structure:
- Tier 1: Core elements
- Layer 2: Design options that are mutually exclusive
- Level 3: Non-exclusive implementation
Figure 3- Overview of DAO taxonomy elements
3.1 What defines the “ DNA '' of a decentralized autonomous organization?
A rough distinction can be made between DAO classification elements. DAO's "D" and "A" are mainly defined by the scope of multilateral agreements and resource management. Another way to determine the framework of these elements is to look at the functions of a decentralized autonomous organization. Is the organization's goal "fund allocation" (such as MolochDAO) or "system design" (such as governance rights related to MakerDAO's MKR tokens)?
However, this classification is not intended to group decentralized autonomous organizations into these predetermined categories. It is just a framework that can be used in different situations, and it will make it possible to identify DAO clusters in the future.
3.1.1 Scope of multilateral agreements
"The scope of a multilateral agreement" determines the extent to which all decisions are agreed by the multilateral parties. The main feature of this classification element is whether the scope of the multilateral agreement is unrestricted or restricted:
If it is restricted, a further distinction needs to be made according to the exemptions of the multilateral agreement. Generally speaking, unrestricted content can be contained in natural language or software.
This is an important distinction because the selected medium determines how its content modifications are implemented. Software upgrades are compulsory, while natural language texts lack rigid implementation and are, to a certain extent, advisory guidelines. Changes in natural language text, such as the composition of components that define specific core values, may not be considered as important as software upgrades. However, natural language texts may still need to express subtle ideas or instructions and link to existing legal contracts. On the other hand, software upgrades are not only binding, but also often related to core operational elements, such as the deployed smart contract or the proposed modification of the native blockchain protocol ( Running on the blockchain).
Further reasons for this structure are twofold:
It should be noted that in this context, opt-in is not considered a multilateral agreement. The concept of multilateral agreement was introduced to reflect that the power initiative and decision-making power between peer users are not hierarchical. Agreeing on a set of pre-conceived rules is not a collaborative decision-making process that creates a flat-order organization. Similarly, opt-outs are not within the scope of multilateral agreements, but the "voting" chapter covers this aspect indirectly.
A closer look at this concept reveals the general distinction between horizontal and vertical mechanisms. Horizontal mechanisms take the form of forks and constitute a non-mandatory exit strategy that bypasses any governance issues. However, it carries the risk of reducing existing network effects and may undermine cohesion within the group. Therefore, the horizontal governance mechanism has been largely ignored, and a more detailed evaluation of the vertical governance mechanism that directly incorporates the solution into the stackable smart contract has been conducted.
3.1.2 Resource Management
As mentioned earlier, resource management is important because it profoundly affects the "autonomy" capability of any decentralized autonomous organization.
The exclusive use of resources on the chain allows decentralized autonomous organizations to directly apply control and initiate actions through smart contracts that may or may not be upgraded. With the exact setting of the corresponding smart contract, it is possible to ensure a balance between the level and feasibility (i.e. upgradeability) of the multilateral agreement, while avoiding counterparty risk.
When using off-chain assets (such as legal currency), natural persons or legal entities ("legal persons") must be given control over their corresponding assets. This legally identifiable contact person has legal control over the off-chain assets, thus bringing counterparty risk. It is possible to abuse legitimate control of DAO assets and ignore DAO decisions (ie, road fraud).
3.2 From DNA to Prefrontal Cortex
The major difference between decentralized autonomous organizations lies not only in function or scope, but also in how the organization operates. Generally speaking, the organizational aspects of DAO are determined by two different elements: discussion and voting.
According to the definition originally proposed, the rules of a decentralized autonomous organization must be "a priori binding, formal and transparent." In order to know what a decentralized autonomous organization or "decentralized autonomous organization in practice" is, it is necessary to make a meaningful distinction between the classification elements "discussion"-whether the discussion is based on rules or discretion Right?
Rule-based discussions can be conducted on-chain through pre-voting. The core idea is that smart contracts are used for implementation forms such as token selection lists (TCRs) or forecast markets. Since these implementations are based on smart contracts, they are all binding, formal and transparent.
Alternatively, rule-based discussions can also be performed off-chain by linking smart contract events to legal contracts.
If the discussion is not rule-based, it must be based on discretion. By definition, discussions based on discretion must be based on off-chain media. These media can be legal contracts that are not activated or legal contracts that are directly linked to smart contracts in a decentralized autonomous organization, or more general forums or chat services.
Discretionary discussions based on discretion usually involve identity-based off-chain discussions, which will be used as a reference for on-chain transactions after a general consensus is reached. In this way, informal open discussions can be incorporated into a rule-based system.
Most decentralized autonomous organization frameworks (for example, Aragon or Metacartel) have used (mostly anonymous) forums to facilitate natural language discussions among members.
3.2.2 Voting Structure
The difference in the voting structure of a decentralized autonomous organization is whether voting is based on liquidity or contribution. Binance Research believes that voting and membership in a decentralized autonomous organization are inherently related, as members must be able to express their views.
The concept of liquid equity describes a voting process performed using transferable, equity-based tokens. This deployment can follow a "exclusive voting" structure to further clarify whether the pledgeable tokens must be native tokens or foreign tokens.
The premise is to assume that decentralized autonomous organizations always use tokenized voting rights. Therefore, the real difference here lies in what these voting rights represent, that is, whether there is "exclusive voting". Is the voting right a "native token" representing a secret ballot right issued by a decentralized autonomous organization? Or are they "foreign tokens" that only represent financial commitments?
At this point, we have to acknowledge that liquidity may have a significant impact on the ability of users to use this "native token" to enter or exit a decentralized autonomous organization (but we will not discuss this topic much). If there is no supply or demand in the primary market or the secondary market, such a system is inherently flawed and will open the door to interesting long tail events.
Mobile equity voting can be not only exclusive voting, but also weighted voting. This difference clarifies the extent to which a token can represent a vote. In addition to this simple setup, there are other functions such as Quadratic voting adopted by Vitalik, where the cost of buying tickets is squared with the number of votes purchased, or n tokens representing m votes.
Furthermore, voting can also be based on contributions rather than equity. Naturally, this will still involve tokens. However, these tokens will not be freely transferable and will only be used to demonstrate the importance of the owner. The idea is that tokens cannot be transferred for any purpose other than voting, and are therefore limited to internal use. As the name suggests, such tokens will usually be issued based on individual contributions and activity.
An important difference here is at what level of identification. Is the "Know Your Member" process based on account address? If so, then the individual may have the opportunity to be represented multiple times. On the other hand, is it based on a government ID or social media network (such as Twitter, IG ID, etc.)? Similar to equity-based tokens, contribution-based non-transferable tokens can still be weighted.
3.3 What impact will it have on decentralized autonomous organizations?
The corresponding design choices of the above elements may affect many other areas, such as:
Increase smart contract risk : From the tradition of TheDAO, decentralized autonomous organizations still face the risk of smart contract failure. As more complex setups require the configuration of multiple smart contracts that normally interact, the risk of smart contracts increases. However, formal verification or insurance of smart contract codes may be able to remedy or mitigate this risk.
Value-added functions : To what extent does the selected architecture allow for subsequent improvements using elements such as exclusive voting or secret voting? You can also use the ID level (for liquidity and contribution equity) to guide members-new members may need support from existing members to join, such as getting recommendations. There are many more such added value functions.
Social cohesion : There are many factors that lead to a high degree of activity and a large number of members in a decentralized autonomous organization. One of them is that the process of exiting such an organization is very simple. Interestingly, insights into social cohesion can be obtained from research on the symbolic effects of weddings. Compared to married couples who register to marry, the relationship between married couples who sign a life-long partnership through marriage is more stable. In this analogy, when defining and defining the membership of a decentralized autonomous organization, a similar operation can be achieved according to this operation.
Dispute resolution capabilities : may be influenced by the design choices of the discussion and voting processes.
Degree of autonomy : It is likely to be affected by the overall environment of a decentralized autonomous organization. Typical questions include: Does the decentralized autonomous organization run on a proprietary blockchain or on a "foreign" blockchain? What will be the cost of launching a censorship attack?
4. Decentralized autonomous organizations and laws
Interestingly, the link between decentralized autonomous organizations and the legislative environment is currently in flux. In fact, its first "connection" was to try to deny any such connection and simply ignore the legal environment. For example, decentralized autonomous organizations want to exist without any law. However, such a strategy would only lead to a waiver of control over how the DAO is treated legally.
If you don't determine a legal structure for an artificially created entity, the court will impose one on you. A general partnership is a very bad legal framework unless it takes the right form or a carefully created structure.
Stephen D. Palley
Fundamentally, a decentralized autonomous organization must have a legal entity. In addition, legal entities also allow decentralized autonomous organizations to integrate legal and smart contracts in the future. So far, the following two strategies have been identified:
- A decentralized autonomous organization can establish a legal entity that enables it to withdraw from any jurisdiction. However, this move will have an impact on the ability of a decentralized autonomous organization to manage funds off the chain.
- Decentralized autonomous organizations can try to fully integrate and leverage one of the newly created legal entity structures to obtain legal person status.
The first strategy involves decentralized autonomous organizations using so-called "Qualified Code Compliance (QDC)" to opt out of a jurisdiction. QDC is mainly derived from the work of Gabriel Shapiro, which can be described as: Members agree to decentralize the autonomous organization's charter, thereby abandoning their legal rights to question the results and operation of smart contracts. However, since the QDC proposed by Shapiro includes the establishment of "unincorporated organizations", it is impossible for a decentralized autonomous organization to have legal personality. Such a decentralized autonomous organization will not be able to conclude a legally binding agreement, and therefore will not be able to directly manage off-chain resources.
The second strategy is not so radical, it just hopes to integrate the decentralized autonomous organization into the legislative environment by obtaining legal person status. Legal person identity can be obtained in a variety of ways, not only allowing decentralized autonomous organizations to exercise control over off-chain assets, but also allowing them to conclude contractual agreements and provide liability protection for participants. Therefore, it is a prerequisite for connecting law and smart contracts.
For example, Malta's Innovative Technology Arrangements and Services Act (ITAS Act) allows the certification of a decentralized autonomous organization as an "innovative technology arrangement", which allows for the choice of legal person status. Similarly, Virginia passed a bill allowing a decentralized autonomous organization to choose to become a blockchain-based limited liability company (BBVA). It is worth noting that dOrg has used this scheme.
Once the DAO is established and has legal personality, it may wish to integrate legal contracts ("wet code") as well as smart contracts. To achieve this, different attempts have been made:
- The initial attempt was to write down the legal intent in written text, rather than writing smart contract code.
- Alternatively, a "code" can be used to describe the written text of the contractual arrangement. These actions did not begin with a legally binding effect, but rather a simple and easy-to-find solution and a non-binding solution.
- There is also a more mature method, which is to convert natural language protocols into machine-readable contract objects. OpenLaw is doing this in its markup language.
Although the inclusion of smart contracts in the category of "wet code" is still in its early stages, it is undoubtedly a pragmatic method that reflects the views expressed in contemporary legal theory.
5. What does "Monarchy" have for the decentralized autonomous organization?
Machiavelli first wrote The Monarchy to educate young people on how to overcome difficulties and successfully reach the other side in a specific institutional environment. So what advice does Machiavelli have for a decentralized autonomous organization? What challenges do they face in their environment? How is this environment related to the current institutional environment?
As of now, the United Nations has 193 nation states and more than 275 jurisdictions worldwide. Within the EU alone, there are more than 40,000 laws, 15,000 court decisions, and 62,000 international standards.
In the past, this daunting scenario has been critical to limiting uncertainty, and the credibility of the data depends entirely on the accountability of the provider. If we can establish a legal system that can ensure strict compliance with the law by the public and regulated entities (that is, data providers), it is possible to hold them accountable for erroneous data.
Therefore, the transaction processing of traditional databases is final from a legal perspective.
However, they are final only if they can be executed, so they also need a certain level of trust in the institutional environment. The risks associated with multinational operations involving many different jurisdictions are magnified. The cost of managing this risk, such as through insurance and third-party services, can be very high.
On the other hand, in DLT-based processes and information, data credibility is not guaranteed by third parties (Davidson, Sinclair, De Filippi and Potts, 2016) but by economic incentives. What does this have to do with decentralized autonomous organizations?
Because it reveals that when a decentralized autonomous organization interacts with the real world, whether it is a direct interaction (such as using a bank account) or an indirect interaction (such as using tokens that represent physical assets), inherent conflicts occur. One of the most radical legislation regarding tokenization comes from Liechtenstein, where tokens are defined as "containers" of (various) physical assets and are therefore protected by the existing legal system.
While this is undoubtedly a significant development, it reiterates the need for a higher-level legal system. Such a structure will be inadequate if links to the existing institutional environment are the first to be avoided. A more pragmatic and less idealized scenario is that the decentralized autonomous organization is not intended to fundamentally replace the existing organizational form, but only to supplement the existing form. Therefore, they also need to be integrated into the broader institutional environment and will also benefit greatly from this and other related actions.
Is the decentralized autonomous organization facing a decline in enthusiasm for participants?
Maybe not yet, but the trauma of "The DAO" has been overcome; the framework of multiple decentralized autonomous organizations is opening the way to the future, and has been supported by more and more elements (such as formal verification of smart contracts). At the same time, the existing legislative environment has increasingly focused on tokenization and "innovative technology arrangements."
However, any report on a decentralized governance organization is incomplete without mentioning the necessary incentive system for coordinating members. Incentives are rooted in game theory and are an integral part of any decentralized governance organization. Therefore, it needs to be carefully adjusted to successfully avoid problems such as the tragedy of the commons, Byzantine behavior, principal-agent theory, or prisoner's dilemma.
Incentives don't have to be positive, they can also be penalties for "necessary avoidance." It is also possible that vested interests are not concise as they are increasingly weakened by the ability to use different derivatives. For example, large token holders may benefit economically from deliberately "breaking" the DAO or shorting their associated tokens.
However, the design of incentive measures for decentralized autonomous organizations is still largely a virgin land. It remains to be seen whether the trial, the increasingly mature decentralized autonomous organization operating system, and self-regulation will be sufficient, or whether the overall "blockchain governance specifications" must be implemented. Incentive-driven governance depends on many different variables and is related to many design elements of the proposed taxonomy. More game theory research must be undertaken beyond the scope of this report. Subsequently, rewards have not been included in the proposed feasible taxonomy.
The fact that rigorous analysis is urgently needed in this area is also reflected in the turnout of existing decentralized autonomous organizations. This is obvious from the overall participation rate of decentralized autonomous organizations. Due to its well-designed UI, it is easier to evaluate the Aragon Governance Proposal (AGP) as an example. On average, the participation rate of ANT tokens (Aragon governance tokens) from less than 50 specific addresses on AGP was only 6%.
The above figures indicate that there are still many challenges to be overcome for decentralized autonomous organizations to achieve what is commonly referred to as the "super-scalable" goal and effectively coordinate a large number of members.
This report was inspired by the Devcon V workshop organized by Gnosis and has benefited greatly from the opinions of Philippe Honigman.
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